Financial incentives for quality improvement in hospital care [known as pay for performance (P4P)] can be directed to either the hospital level or redistributed to the department level. Theoretically, performance payments distributed to lower organisational levels are more effective in increasing performance than payments directed to the hospital level, but the empirical evidence for this expectation is scarce. This paper compares the performance of hospital departments at hospitals that do and do not redistribute performance payments to the department level. We study a Danish P4P scheme to provide patients with case managers. Applying difference in differences analysis, we estimate a 5 percentage points higher performance at hospital departments that are subject to a direct financial incentive. Our results suggest that payers can improve the effectiveness of P4P payments by distributing payments to the department level rather than the hospital level.
Keywords: Hospital incentives; Incentive design; Pay for performance; Team production.